Academic journal article Business: Theory and Practice

Audit Committee Independence and a Contracting Perspective on Goodwill Impairment: Singaporean Evidence

Academic journal article Business: Theory and Practice

Audit Committee Independence and a Contracting Perspective on Goodwill Impairment: Singaporean Evidence

Article excerpt

Introduction

The International Financial Reporting Standards (IFRS) have been dispersed worldwide; the standards are being applied in varying degrees by more than one hundred jurisdictions in six different continents (Daske et al. 2013, Danjou 2015). One of the driving forces for the world-wide implementation of the IFRS is the globalization of capital markets, which, in turn, creates increasing demand for transparent and comparable financial reporting by various stakeholders (Glaum et al. 2013).

A number of initiatives were proffered by the International Accounting Standards Board (IASB) to reduce alternative accounting methods with the hope of improving the comparability of financial statements. One example of these initiatives is the issuance of IFRS 3 Business Combinations and the revision of IAS 36 Impairment of Assets, which are related to acquired goodwill. In 2005, the IASB eliminated alternative accounting methods for acquired goodwill and required firms to implement an impairment-only approach to goodwill because the board believed that comparability would be affected when there are alternative accounting methods to acquired goodwill (Fabi et al. 2014).

To date, most research on IFRS implementation tends to focus on listed firms in European countries (e.g., Murphy 2000, Jaafar and McLeay 2007, Yip and Young 2012, Cascino and Gassen 2015). This study attempts to address this gap in the literature by investigating IFRS implementation focusing on goodwill impairment by listed firms in Singapore, a developed country that belong to the Association of South East Asian Nations (ASEAN). Specifically, this study examines factors influencing and constraining the decision to recognize zero goodwill impairment in a sample of 52 Singaporean listed firms from 2010-2012.

To examine factors influencing and constraining the decision to recognize zero goodwill impairment, this study selected firms that encountered book-to-market ratios above one for three consecutive years. With book-to-market ratios persistently above one for three continuous years, these firms have indications that goodwill may be impaired, yet they reported zero goodwill impairment. This study selected Singapore as an institutional setting for the analysis of the decision to recognize zero goodwill impairment because it is one of the few ASEAN countries that have fully implemented IFRS related to goodwill impairment. More importantly, since ASEAN has become a vital economic entity (Saudagaran and Diga 1998) and is keen on integrating the region through the establishment of the ASEAN Economic Community (AEC) (ASEAN 2008), it is imperative to understand the potential drivers and constraints to IFRS implementation within this region. This study focuses on IFRS 3 Business Combinations, which is related to goodwill impairment (1), due to the increasing focus from regulators, practitioners and academics (e.g., Beatty and Weber 2006, Godfrey and Koh 2009, Ramanna and Watts 2012, Abdul Majid 2015, 2017).

The remainder of this paper is structured into four sections. Section 1 highlights the prior literature and describes the development of the hypotheses. Section 2 outlines the research design. Section 3 presents and discusses the empirical findings. Section 4 summarizes this study and presents its conclusion.

1. Prior literature and hypotheses development

The harmonization of accounting standards through an IFRS implementation has garnered increasing interest from regulators, academics, and practitioners, both in developed and developing countries (Baker and Barbu 2007, Yip and Young 2012). One of the expectations of an IFRS implementation is to achieve the comparability of financial statements, which, in turn will facilitate international transactions and minimize exchange costs (Cairns et al. 2011, Phuong and Nguyen 2012, Yip and Young 2012).

Nevertheless, an improvement in financial statements comparability does not depend entirely on the application of a uniform set of accounting standards (DeFond et al. …

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